Lost in Translation: From U.S. Corporate Charter Competition to Issuer Choice in International Securities Regulation

Abstract

Corporate charter competition among U.S. states has been held out as a model of welfare-enhancing regulatory competition. Proponents of this story also rely on it as a basis for promoting regulatory competition in international securities regulation. Issuer choice proponents argue that an issuer of securities should be permitted to choose the securities regulation of any nation to govern its securities offerings and trading worldwide. This Article challenges the notion that the claimed success of corporate charter competition among U.S. states argues in favor of issuer choice for international securities regulation. Even granting the assumptions of race-to-the-top advocates and accepting the best story for corporate charter competition, that story translates poorly into the context of international securities regulation. Reliance on that story to promote issuer choice glosses over important differences in political economy as between U.S. states in a federal system and independent nations in an anarchic global environment. This argument I pursue along two major lines. The first involves choice of law coordination. While U.S. states have been able to coordinate around the internal affairs rule for choice of corporate law, no similar rule exists in international securities regulation, where the basic rule is territoriality. The internal affairs rule among U.S. states emerged from historical conditions and political dynamics that do not exist among nations. I argue that international choice of law coordination for issuer choice is unlikely. Second, even setting aside the choice of law problem, and assuming that international choice of law coordination were possible, serious doubt exists that vigorous competition would emerge. On the basis of the Delaware success story, few if any nations would seem to have both sufficient incentive and sufficient capacity to compete over securities law. For established capital market countries, regulatory revenues would likely be too small to interest such countries or to enable them to demonstrate the fiscal dependence on regulatory revenues that would be critical for demonstrating a credible commitment to issuers. All but the smallest nations would suffer this disability. The smallest nations, on the other hand, would not likely possess sufficient legal and regulatory infrastructure to be able to offer sophisticated, internationally competitive securities law. Given the dearth of competitors and lack of competition, issuers might just stay home. They might not be willing to opt out of their home country rules even if offered the choice.